Definition of authority bonds


What is an authority bonus?

An authority bond is a debt security issued by an authority, such as a government agency or corporation, formed to manage a public company. A public company is a commercial organization that is wholly or partially owned by the state and controlled through a public authority. Authority bonds are also known as local authority bonds.

The purpose of an authority bond is to finance the operations of a revenue-generating public company. Investors buy authority bonds for a specified period, which allows the financed project to be completed and start generating income; After this period, the bond will pay interest at a specified rate. Authority bond buyers are entitled to the company’s income, which serves as the bond’s yield. (Yield refers to the earnings generated and realized on an investment during a particular period of time.)

Key takeaways

  • An authority bond is a debt security issued by an authority, such as a government agency or corporation, formed to manage a public company.
  • The purpose of an authority bond is to finance the operations of a revenue-generating public company.
  • Investors buy authority bonds for a specified period, which allows the financed project to be completed and start generating income; After this period, the bond will pay interest at a specified rate.
  • Authority bond buyers are entitled to the company’s income, which serves as the bond’s yield.
  • While municipal bonds tend to finance low-risk infrastructure projects for the wider community, authority bonds can finance projects that have varying degrees of attractiveness and may not generate the projected income.

Understanding authority bonds

Authority bonds are issued by an authority, such as a government agency, a public organization, or a company. The bond guarantee comes from the income of the project it finances.

While bonds are generally issued to finance infrastructure and government and civic agencies, the funds from an authority bond are applied to finance a specific project.

Authority bonds are generally considered low-risk investments, although the risk varies by issuer. The risk of an authority bond is correlated with the risk of the specific project it finances.

While municipal bonds tend to finance low-risk infrastructure projects for the wider community, authority bonds can finance projects that have varying degrees of attractiveness and may not generate the projected income.

Authority Bonds vs. Municipal Bonds vs. General Obligation Bonds (GO)

Authority bonds are similar to municipal bonds. Both types of bonds are issued by related entities for the same purposes. And while there is some overlap in the types of projects they fund, there are also fundamental differences.

Municipal bonds tend to be issued for infrastructure projects, while authority bonds are generally issued for community organizations or expansions of organizations.

For example, a municipal bond could be issued to help finance the construction of a new bridge, and bondholders could be paid using the new bridge’s tolls. An authority bond could be issued for a new wing at a community recreation center, and the bondholders of this project could be paid from the funds generated by membership fees or day pass fees.

Another fundamental difference is that authority bonds incorporate margin protections. Margin protections mean that bondholders are assured that they have not overpaid for the bonds. This guarantee reduces the risk for bondholders because the lower price means that the project does not have to generate as much income to pay the bondholders.

Authority bonuses are a type of income bonus. Revenue bonds that finance income-generating projects are thus secured by a specific source of income. Generally, revenue bonds can be issued by any government agency or fund that is managed in the manner of a business, such as entities that have operating income and expenses.

Income bonds can be compared to general obligation (GO) bonds. A GO bond is a municipal bond backed solely by the credit and tax power of the issuing jurisdiction (rather than the proceeds of a given project). GO bonds can be redeemed through a variety of tax sources. Municipal bonds are sometimes revenue bonds (but not always).

www.investopedia.com

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Mark Holland

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